Why Oracle Paying $9.3 B for NetSuite Acquisition is a Steal

Oracle has announced its intention to buy cloud CRM company NetSuite for a reported $9.3 billion. But the NetSuite acquisition means much more to Oracle, which is now struggling with declining revenues in its legacy business of software and hardware.

The situation Oracle is in is not a unique predicament. IBM is witnessing the same thing, and so is Microsoft. But both these companies jumped on to the cloud industry early on – though not as early as Amazon – and have slowly built their cloud offerings to where they are beginning to offset overall revenue declines. Those declines are coming from the old way of business: IBM with its mainframes, software and multiple services, and Microsoft with its Windows and Office software – all of which were the bread and butter of these companies for many decades.

But Oracle was late to the cloud race because Larry Ellison, it’s CEO, felt that cloud was a “fashion trend” that would go away. Well, it didn’t, and Oracle is paying the price for that mistake today.

Their core revenues from hardware and software are declining at an alarming pace, and their cloud-based services are only now picking up their own growth paces. As such, Oracle is in a position where it will take at least two years for that gap between old and new revenues to close to where they can at least break even.

Fortunately, Oracle is cash-heavy and can afford to take shortcuts to profitability and growth. That’s exactly what they did with the PeopleSoft acquisition in 2014, and they’re doing it again with the NetSuite acquisition. The new acquisition will give them a stronger foothold in the CRM-on-the-cloud marketplace, where growth is much faster in the middle-market segment rather than the enterprise segment.

That middle segment is being slowly captured by Microsoft, Salesforce and other companies with their Sofware-as-a-Service offerings such as Office 365 and so on. This is the market that Oracle is after with the new acquisition, and this is the very market that is being fought over by top companies like Microsoft and Google.

Oracle still has a long way to go before it can show growth, and the NetSuite acquisition – which brings with it a $125 million loss in 2015 – isn’t going to help directly with accretive revenues. However, once Oracle restructures the business and streamlines it (read: cut jobs and redundant functions), it does have the potential to be a major cash cow for Oracle. Plus, it will give them a hook in that middle market that I spoke about.

As a loss-making business, this acquisition has worked out well for NetSuite. As to how and by how much Oracle will benefit from the $9.3 billion expenditure, only time will tell.